Schmidt v. Equitable Life Assurance Society of the United States

We are unable to concur in the majority opinion. The options granted by the clauses in the policy under consideration provide that the insured may elect within three months after default one of the following options: (a) To receive the cash surrender value, (b) to purchase non-participating paid-up life insurance, (c) to continue the insurance for the face amount as paid-up extended term insurance for such period as would be covered by the surrender value of the policy.

The options never provided for the application of any fund greater than the cash surrender value. Cash surrender value means "the value of a policy or contract of insurance given up for cancelation." (In re Welling, 113 Fed. 189; Hiscock v. Mertens,205 U.S. 202, 51 L. ed. 771.) It is no more than surplus premium paid in on life insurance. (In re Morgan, 282 Fed. 650.) With this precise language in the contract there is nothing that gives anybody an option at any time or under any condition to receive the amount payable at the death of the insured. Moreover the options provide that before any of them may be exercised the policy must be "surrendered." To surrender means "to cancel, to yield up," within the meaning of a policy which stipulated that after three annual premiums the insured might surrender the policy and receive a paid-up policy for a lesser amount. Wells v.Vermont Life Ins. Co. 28 Ind. App. 620, 63 N.E. 578;Semble-Goodhue v. Hartford Fire Ins. Co. 175 Mass. 187,55 N.E. 1040.

It is clear this contract has reference to a value existing while the insured is still alive, because paid-up value can only exist during the lifetime of an individual. Referring to this value the Supreme Court of Pennsylvania in Irving Bank v.Alexander, 280 Pa. 466, says: "The right to collect this value, or change the person to receive it might have been exercised at any time during life, but on death these rights disappear; they do not survive the insured." Surrender value represents a different sum than the proceeds payable on a policy after the death of the insured, which is created through the happening of the insurance hazard. It is also plain that the policy contract contemplates that the option shall be exercised during the life of the insured. The policy does not provide that the "beneficiary" may exercise the right, but it is given to the"insured." The contract is a three-party contract, between the insured, the insurer and the beneficiary. The right to elect is not given to the beneficiary.

Since these options provide for the application for "a cash surrender value," and the cash surrender value can only exist in the policy during the life of the insured it is clearly contemplated they must either be exercised during the life of the insured, or applied in such a manner as would bring the beneficiary exactly the same results as would have been obtained by the insured if living. The majority opinion holds that the right of election survives to the beneficiary, and that she has the right to the greatest amount of money obtainable under the policy. This is correct only to the extent that the beneficiary can alone obtain what the insured could have obtained, because to permit otherwise would write something into the policy that is not there.

In our opinion this case cannot be distinguished in principle from Coons v. Home Life Ins. Co. 368 Ill. 231. The only difference in the options, is that in the Coons case, if election was not made, paid-up insurance was given automatically. In the present case it provides that paid-up insurance will be continued if no election was made. The insured made no election, and the beneficiary was entitled to make no election other than the insured could have made. The Coons case held that the policy lapsed at the expiration of the grace period, and that prospective dividends could not extend the policy so as to permit a beneficiary to recover, where the death of the insured took place after the grace period, without payment of premium. TheCoons case cites Keller v. North American Life Ins. Co. 301 Ill. 198, where unpaid premium notes at the time of the death of the insured were claimed to amount to payment of premium, which gave the policy a loan value against which the insured could borrow enough to pay the notes thereby creating automatic insurance up to the time of the insured's death. We adopted the language of the Keller case, where it is said: "It makes the company furnish the money out of the loan value of the policy with which to pay the note that Keller gave it to create the loan value. By its operation the note provided the means with which to pay itself, and secured, in addition thereto, $80,000 of insurance. To place such a construction on the transaction * * * would be to defraud the company of its property."

In the Coons case we held that the primary end sought was to have the premium paid out of the funds which the premiums, when paid, created, but this position was rejected upon the authority of the Keller case. In the present case the primary end sought is to have the loan paid out of the amount payable upon the death, upon the assumption that three-months' additional insurance, without pay, was secured to the assured by reason of the options given to the insured in case of default after three full years of premiums had been paid. As pointed out above the options only apply to surrender value, and not death value.

In exactly the same kind of a policy as is herein involved, and with respect to the same options, the Supreme Court of Minnesota held: "What really happens upon default in the payment of premiums is that during the grace period the insured is tentatively indebted to the company for the new premium, which, in case of loss, is deducted from the payment made under the policy, but if loss does not occur, and the premium is not paid during the grace period the default takes effect as of the due date of the premium, and automatically the extended insurance goes into effect as of that date, subject to the insured's right during the three-months' period to choose one of the other two options as substitute therefor." Erickson v. Equitable Life Assn.193 Minn. 269, 258 N.W. 736.

In Clausen v. New York Life Ins. Co. 244 Iowa, 802,276 N.W. 427, it is held that where a life insurance policy lapsed for non-payment of a premium some 335 days prior to the insured's death, and the loan value was exhausted except for the sum sufficient with which to purchase insurance for 270 days from the date of default, the beneficiary could not under like options elect to have the paid-up insurance value commence to apply three months after the default, and thus recover the face of the policy.

In Mills v. National Life Ins. Co. 136 Tenn. 350, 189 S.W. 691, commenting upon a lapsed policy the court said: "We do not find any provision of the policy whereby it could be contended that continued insurance in the full amount could exist, and an indebtedness be outstanding at the same time. When the policy lapses it becomes, so to speak, in liquidation under its terms, and if the reserve or cash value has been withdrawn, there is no fund left to pay for continued insurance during the extended term, and, therefore, the extended term insurance fails to take effect. This is necessarily sound insurance business."

In the present case there was only enough cash surrender value left, after deducting the loans, to pay for four days' insurance. No other fund is authorized under the terms of the policy to be applied towards the payment of extended insurance. The present opinion does not even deduct part of the death benefit to pay for the three-months' extended insurance, but only uses it to pay the loan and leaves three-months' insurance in force without payment of premium. The effect of this decision is to overrule the Coonscase, because, in the Coons case, even though extended insurance was automatically applied, the same three options were given as in the present case. Since the majority opinion holds the option can be exercised after the death of the insured named in the policy, the same facts as shown in the Coons case, with the same options, upon election would authorize a recovery, in spite of our prior holding. We are of the opinion that the judgment of the Appellate Court should be reversed.

Upon petition for rehearing the following additional opinion was filed:

Per CURIAM: A motion has been made in this case under section 92 of the Civil Practice act (Ill. Rev. Stat. 1939, chap. 110, par. 216) to submit to this court certain original evidence not offered in the trial court.

This section purports to give the Supreme and Appellate Courts power to receive evidence not produced on the trial. Except as provided by the constitution for the filing of original suits in the Supreme Court, its jurisdiction is wholly appellate. In so far as section 92 of the Civil Practice act, supra, attempts to give the Supreme Court original jurisdiction on the appeal of a cause, of matters germane upon the trial thereof, this provision contravenes section 2 of article 6 of the constitution, which provides that the Supreme Court has appellate jurisdiction, only, in all cases except in cases relating to the revenue, mandamus and habeas corpus. The matters offered do not come within the original jurisdiction of the court. The motion is denied.